East Asian model: Will chic villages draw business, jobs

Deutsche Bank foresees a shift from India’s current services-driven growth trajectory to an East Asian growth model based on the mass deployment of labour and capital. In its recent report, The Wide Angle: India 2020 – The Road to East Asia – the research firm explains that this coherent economic model emerges from Prime Minister Narendra Modi’s recent speeches and policy actions.

Apart from dealing with macro-economics concerns like inflation and subdued growth, generating jobs has also been on pro-business Modi’s priority list ever since he took office in May this year.

Speaking to CNBC-TV18, Sanjeev Sanyal, Global Strategist at Deutsche Bank AG and the author of this report, says the East Asian model will be more material and energy intensive, hence it will have the ability to generate jobs.

“PM Modi’s model includes export-oriented manufacturing, heavy infra building and urbanisation. Although the new strategy will expand the financial system, it will require keeping the rupee weak,” he adds.

Further, this government seems to be serious about labour laws and with the Chinese labour becoming more expensive, shifting of labour from rural to urban areas is being taken as a fabulous opportunity via creation of smart cities. Thus urbanisation of rural areas will be a key trigger for growth, he says.

On the flipside, expansion of banking system, land acquisition and infra issues persists to be key risks for growth, Sanyal cautions.

Below is the verbatim transcript of the interview:

Q: Just detail to us this massive shift you are talking about. I guess your report is based on Prime Minister Modi’s call ‘manufacture in India or make in India’; you see that as the definitional shift?

A: Yes, I think everybody agrees that this government is quite hardworking; the question is what was their roadmap and everybody has been thinking about that. However, if you begin to listen to what he is saying and the actions his government is taking, it is becoming quite clear that there is indeed a coherent roadmap that they have. It includes manufacturing, exports, it includes heavy infrastructure, urbanisation and so on. When you put all of these pieces together what you get is really emerging, looking very close to the East Asian model, which is basically about bulk deployment of labour, capital and so on. However, it is a well trodden path; there are well known risks but it is a well trodden path.

Q: Can you flesh it out for us in terms of how much infrastructure will actually be needed for this manufacturing led growth in the form of power, fuel, etc and do we have enough wherewithals to boost it?

A: There are reams and reams of reports including in this one which have made estimates about the amount of power, energy, etc that will be required. There is no doubt about one thing which is that if we go down this path, the growth trajectory will be much more material and energy intensive than has been the services driven growth path that we have had so far.

So, lot more energy will be needed, lot more materials will be needed, it is a much more grittier form of growth than the services driven path. However, on the other hand, it is a path that if it works, it generates a lot more jobs than services data; that was the real problem with the services driven growth model. It generated growth when going were good but even then it was not generating jobs and of course then it slowed down. So, that is really what the bet is.

Q: There is certainly an argument in favour of ‘make in India or manufacture in India’ simply because Chinese labour has become very expensive, Chinese inflation was very high. So, clearly that opportunity advantage is there for India especially with the currency now having depreciated but will we be able to negotiate the many more problems that manufacturing will require for instance land acquisition; that stands as a very big hurdle at this point in time, a political issue. India doesn’t not even have the kind of land luxury that China has. In terms of density of population, that is going to be a far more difficult task even without the Land Acquisition Act and then you have a democracy, a very voluble, a very argumentative democracy and then there are other issues like environment. Materiel driven, manufacture driven growth at this level of environment concerns you think this will succeed at all?

A: Any path that was taken was going to be difficult. The question is can this be done? It is a well trodden path, the counties from Japan to newly industrialized country (NICs) to China most recently have done it. So, in that sense it is a well known strategy.

As far as being densely populated, that is not really a concern. Japan is hugely, densely populated and even China. The bits of China that drove the growth which is the Eastern Seaboard is even more densely populated than India. So, I am not concerned about that.

I agree land acquisition, many of the other infrastructure issues are key but I think the real risk in this, even if you sort out all the other things, the real risk in this is the expansion of the financial system because this whole thing is based on a continuous deployment of ever more savings and investment and that will have to be done by the financial system.

So, you will have to expand the banking system for example buy an order of magnitude from what it is now and when you do that – obviously, you will make mistakes, there will be misallocation and how you handle that process is key.

Even China and Japan which succeeded in keeping growth going for decades are still grappling the this issue. There are countries like the South East Asian countries that couldn’t handle it and then had the Asian crisis in 1998. So, this is really the key risk to the strategy, the financial expansion.

Q: For the past seven decades, our infrastructure and our public sector-led industrials have clearly failed in terms of productivity or in terms of competitiveness. Why should we succeed now, why should the administration be able to deliver any better, why did we go into services, why did we have the TCSs and Infosys’s and the BPOs and the call centres; simply because there you are not the dependent on government, you are dependent on an external sector. Why should that change fundamentally? At the margin, this government maybe a little more administratively capable but can there be a paradigm shift?

A: Two things; one is that we never attempted this. We never attempted to generate growth through this process. So, for example urbanisation, a very key part of this whole model is deployment of labour which will be all about sucking out labour out of the rural areas and deploying them and urbanisation is the way you do it.

However, for a very long time, in fact essentially till very recently, we had the impression that urbanisation was somehow a bad thing, that somehow we need to create employment guarantee schemes to keep people from not moving to the cities because that will somehow cluttering up the cities and making a mess of it. Instead, now we have a completely different approach and saying we will build 100 new smart cities; that is paradigm shift in the way we are thinking about the problem.